Company Notes Digest 10.29.18

Each week we read dozens of transcripts from earnings calls and presentations as part of our investment process. Below is a weekly post which contains some of the most important quotes about the economy and industry trends from those transcripts. Click here to receive these posts weekly via email.

Recent volatility has people concerned and some are starting to model in recessions. However the real economy is still strong and the outlook is positive. Securities markets are leading indicators though, especially when driven by Fed tightening. If the Fed doesn’t bow to political pressure, volatility is likely to persist. International markets have already been in bear markets for some time.

The Macro Outlook:

It’s a little too early to say if recent volatility is having an impact on the economy

“As you point out, it has been a more recent phenomena and here the volatility that we have seen over the last few weeks. I think it’s just too early to kind of make any generalizations about, the impact of the volatility on deal making.” Moelis & Company (MC) Co-President Navid Mahmoodzadegan

The underlying US economy is quite strong, particularly for small to midsize businesses”.- Robert Half International (RHI) CEO Max Messmer

And the US consumer is alive and well and the outlook is positive

“I also want to say that the U.S. consumer is alive and well… the wage rates are up and people are spending. Consumer confidence is off the charts, new records. So I think the – retail sales may have slowed slightly, but it’s not like, all of a sudden, we have a vacuum in the demand.”Stanley Black & Decker (SWK) CEO James M. Loree

“favorable commodity prices, strong economic growth, and the global need for infrastructure will continue to drive strong end user demand across many of our end markets.” – Caterpillar (CAT) CEO Jim Umpleby

But people are getting concerned

“From a macro perspective, the ongoing tariff fight between the U.S. and China growing anxiety about rising interest rates, market volatility and potentially slowing global economies are all a concern.” – SVB Financial Group (SIVB) CEO Greg Becker

Many are starting to model recessions

“look you are starting to hear about private equity firms and prognosticators start to model in recessions in their base cases on deals, et cetera, et cetera, et cetera. So I think there’s an acknowledgement that at some point the economy will slow down.” – Moelis & Company (MC) Co-President Navid Mahmoodzadegan

“we do believe in economic cycles and we do believe that there will be another economic cycle” – Barclays (BCS) CEO James Staley

It’s already been a bear market outside the US

“outside the U.S. we’ve already been in bear market territory. So the euro stock’s 50%, down about 13% in the last 12 months. China is down about 20%…to the question on exits or kind of the overall environment, we’ve actually been operating in an environment in Europe and Asia where we’ve already seen the stock market pullback probably over the last several quarters in a lot of those markets.” – KKR & Co. (KKR) co-COO Scott Nuttall

And the Fed is getting too tight for some people’s comfort

“He was supposed to be a low-interest-rate guy. It’s turned out that he’s not….My instinct is that he’s raising it too much…To me, the Fed is the biggest risk because I think that—I think interest rates are being raised too quickly”- US President Donald Trump

Lots of companies are talking about tariffs

“we’re monitoring the tariff situation very closely. There’s a lot of activity around that. I would say from what we see today, we don’t see anything material as it relates to the tariffs, whether it’s pull-ins or just the overall impact of tariffs. But we are doing quite a bit to adjust our supply chain, as I’m sure many others are.” – Advanced Micro Devices (AMD) CEO Lisa T. Su

“From a macro perspective, the ongoing tariff fight between the U.S. and China growing anxiety about rising interest rates, market volatility and potentially slowing global economies are all a concern.” – SVB Financial Group (SIVB) CEO Greg Becker

Tariffs drive inflation

“as part of our ongoing initiatives to respond to external factors, including raw material tariff and currency headwinds, we have recently announced new cost base price increase” – Whirlpool (WHR) CEO Marc Robert Bitzer

“We will continue to put price into the market related to the tariffs that are coming in January for List 3. And we will also continue to monitor the elasticity of how the volume responds to those price increases” – Stanley Black & Decker (SWK) CFO Donald Allan, Jr.

But are tariffs just an excuse?

“We don’t even have tariffs. I’m using tariffs to negotiate. I mean, other than some tariffs on steel—which is actually small, what do we have?…I read that today: We’re worried about the tariffs. You know what happens? A business that’s doing badly always likes to blame Trump and the tariffs because it’s a good excuse for some incompetent guy that’s making $25 million a year.” – US President Donald Trump

International:

Inflation in the EU expected to pick up soon

“While measures of underlying inflation remain generally muted, they have been increasing from earlier lows. Looking ahead, underlying inflation is expected to pick up towards the end of the year and to increase further over the medium term” – ECB President Mario Draghi

On Brexit, things will be sorted out

“It’s very hard to imagine that Brexit won’t be sorted out in some reasonable manner that will enable life to go on economically. Both the UK and the EU need each other” – Group 1 Automotive (GPI) CEO Earl Julius Hesterberg

No stress in the UK consumer

“we are not seeing yet any concerning signs of stress among our U.K. consumers or business customers” – Barclays (BCS) CEO James Staley

Financials:

There’s still plenty of liquidity out there

“The abundant liquidity in markets is another challenge… Venture capital and private equity investments are to near record levels, fund raising remains strong with a lot of dry powder on the sidelines and the ex-environment is relatively healthy. – SVB Financial Group (SIVB) CEO Greg Becker

Fear in the public markets negatively impacts exits in private markets

“if fear in the public market starts to effect – exit the private funding in a meaningful way or our late stage clients would likely be the first to feel the negative impacts of that” – SVB Financial Group (SIVB) CEO Greg Becker

Housing markets are slowing but demand fundamentals are still very strong

“we are now seeing a scenario where slowdown of home price appreciation and a slight increase in inventory will meet strong demand fundamentals, including favorable demographics, a homeownership rate at a 52 year low and a strong need for rental homes and apartments.” – Whirlpool (WHR) CEO Marc Robert Bitzer

Consumer:

Auto inventories are fairly balanced

“we’re seeing an aggressive market. Inventories are fairly balanced car to truck for the – that’s the second quarter in a row” – Group 1 Automotive (GPI) President, U.S. Operations Daryl Kenningham

Technology:

PCs are alive and kicking

“As it relates to the current supply environment, we did see some pockets of constraints in the supply chain around PCs. We saw that towards the end of the third quarter. We are increasing our production such that we can satisfy some of that demand. And I think that’s a short-term statement.” – Advanced Micro Devices (AMD) CEO lisa T. Su

“Supply is tightest at the entry level of the PC market and in our IoTG business. Within our CPU product lines, we’re prioritizing the production of our Xeon and Core processors so that we and our customers can serve the high-performance segments of the market. Our biggest challenge in Q4 will be meeting any additional PC and IoTG demand beyond our guidance, and we do expect fourth quarter upside from here will be limited.” – Intel (INTC) CEO Robert Holmes Swan

GPU channels are working through over-supply

“the weakness in the GPU channel or primarily in the sell-in, is, let’s call it, for – we might see that for the next quarter or two. But as you look through the overall business, I think gamers are still buying GPUs, and so this is really a matter of just absorbing some of the first half let’s call it oversupply as it relates to GPUs. And that’s translating into a bit weaker sell-in. But we are still tracking the sell-out and the sell-through through the – to the end customers.” – Advanced Micro Devices (AMD) CEO Lisa T. Su

Google is increasingly investing in data centers

“we’re very focused on ensuring that we have the needed compute capacity to support growth. And that’s what you’re really seeing with the uptick in investment.To give you a bit of a breakdown, the largest component continues to be machines. But relative to last year, it’s important to note that datacenter construction is an increasing percentage of our CapEx investment.” – Alphabet (GOOG) CEO Sundar Pichai

Industrials:

China still needs a lot more airplanes

“In China, from a macro standpoint one of the fastest growing commercial aviation markets in the world. Over the next 20 years we said a world that needs 43,000 new airplanes; about 7,700 of those are in China. Traffic growth patterns are very strong in China and the rising middle-class population is a tremendous driver there, well beyond normal, I’ll say GDP metrics, so about 150 million new passengers every year in Asia are fueling that growth. So China is very interested in a healthy growing aerospace industry” – Boeing (BA) CEO Dennis Muilenburg

Metal prices are not increasing

“there’s certainly not a strong growth in metal prices in the cards right now.”- Alfa-Laval AB (ALFVF) CEO Tom Erixon

Materials, Energy:

The energy industry remains in a survival mode

“Industry remains stuck in a sub-survival mode with minimal industry reinvestment, which is now leading to reduction in available equipment. We’re seeing signs of customers of being recognized how difficult this is as some are now accepting rate increases and accrue labor premiums to help us manage through these issues.”- Precision Drilling Corporation (PDS) CEO Kevin Neveu

There’s high demand for efficient rigs

“Now turning to the United States, as our customers prepare for 2019 drilling programs, the drive to the most efficient rig seems to be accelerating even as the market volatility is tampering our customers’ risk appetite. We are experiencing a surge in demand for the most efficient rigs…he industry drive and customer preference for the most efficient rig is not going to slow down anytime soon. I don’t see – obviously, day rate aren’t going to keep on going up. There’ll be a plateau at some point. I think that’s real. But we see just very strong demand kind of across the basins and across the customer base right now for no question for pad walking rigs that can deliver consistent and predictable results.”- Precision Drilling Corporation (PDS) CEO Kevin Neveu

Saudi Arabia’s political decisions could impact energy prices

“I think that political decisions related to Saudi Arabia needs to be very much thought through. The implications are that they destabilize the Middle East with sanctions against the two major oil exporters of Iran and Saudi Arabia in parallel is raising the stakes in the game significantly…to the degree the world decides to go on the sanction basis against Saudi Arabia, we will see a major impact on the energy prices, and we will see a major investment boom in other geographies” – Alfa-Laval AB (ALFVF) CEO Tom Erixon